In a global environment of high and rising interest rates, alongside a large-scale conflict unfolding in Europe, it is difficult to envy those trying to pick the winners in tumultuous financial markets.
But fund managers need to find good investments in both good and volatile markets.
We asked three fund managers for their outlook on New Zealand and Australian markets over the next two years.
They say there are industries strong enough to push through global volatility, and companies lurking in the NZX that may be diamonds in the rough.
Victoria Harris – Devon Funds
Devon Funds portfolio manager Victoria Harris says the previous decade has been a relatively easy time to be a fund manager, because markets generally trended upwards. But that has all changed.
“It is now really a stock-picker’s market, with super-high inflation putting an end to the easy money environment. We are going to see funds trend towards cheaper companies with growth prospects and value names,” Harris says.
Harris prefers the Australian market over the NZX for the next 12 months, because of Australia’s strong commodities and energy sectors and the Australian Reserve Bank’s less aggressive interest rate hikes.
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But not all industries are safe in the Australian markets. Those sectors that rely on consumer spending may suffer when household wallets tighten, she says.
“Housing-exposed retailers may have a hard time in the next few years. Places like Bunnings, Harvey Norman, and building supply businesses may suffer in the coming year. Those companies with high debt will also find their profits impacted.”
So instead Harris is looking to companies with pricing power, and the ability to pass on any rising costs to consumers, such as supermarkets, energy and infrastructure, as better investment opportunities for the near future.
Hamesh Sharma – Pathfinder
Pathfinder portfolio manager Hamesh Sharma says he is looking to invest in the financial and banking sector of the Australian market.
“As interest rates rise bank margins go up… we think the Australian Reserve Bank is going to follow New Zealand in this regard so we want to make sure we are exposed to this part of the market,” Sharma says.
Sharma says he is looking closely at National Australian Bank, the parent company of BNZ, and insurance provider QBE.
“We have seen insurance providers have been making more money over these past few years and think that is a trend that will continue. Barring some events such as Australian bush fires, we think insurance providers such as QBE have ready capital to really grow over the next year or so.”
Like Harris, Sharma says the retail sector will have tough years ahead as the squeeze is put on consumer spending.
But he made the exemption of Woolworths, whose ability to pass on extra costs to consumers was good protection in a portfolio.
In the local market, Sharma says he is looking at businesses focused on renewable energy such as gentailers Meridian and Contact, as well as more specialised companies such as Infratil and solar panel manufacturers.
“In the last few years the cost of building solar energy projects has dropped 10%. As we see an acceleration of renewable energy, solar is a space to keep an eye on.”
David Fyfe, Mint Asset Management
Mint Asset Management portfolio manager David Fyfe says as we see a big unwind of cheap money he is looking to sectors that could handle the volatility, such as defensive growth stocks.
“These are companies that are high earners with a strong retail base. Household names that do both jobs of being a defensive holding while continuing growth,” Fyfe said.
Companies in this space include Contact Energy which is both servicing an existing customer base, and actively preparing for growth in renewable energy, he says.
But a trend towards defensive growth did not mean there was no space for thematic investment, especially if the theme involved the green recovery in response to climate change, he said.
“Despite the market volatility the push towards renewable energy is not going away. Because of that we think there are still good investments in Infratil and Trustpower locally. But this is an investment for the long term as there is a long road ahead for renewables.”
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Victoria Harris, Devon Funds:
EBOS Healthcare: New Zealand’s largest provider of medical consumables, equipment, solutions and supplies to the healthcare market.
“We think this is a great company that has had a good few years and is poised for further growth. We think despite some volatility in its sector, it will continue to do well in the coming years.”
Hamesh Sharma, Pathfinder:
Pushpay: Saas company that manages donations for charities operating within the United States.
“The valuation of tech stocks has been smashed as investors adjust future earnings against inflation. We still think Pushpay is a solid investment in the medium term. It is not so much a bargain but is cheap relative to other technology companies of its size and revenue.”
David Fyfe, Mint Asset Management:
Serko: Saas company that provides technology to help businesses manage travel and expenses.
“This local business travel management software has just signed a large deal with Booking.com, we see that as a huge endorsement for what the company is doing. It comes with a certain amount of risk as it is connected to international travel, but we think this certainly has potential.”